Fact Check: Do income tax cuts help small businesses?
This myth continues to circulate despite a large amount of research from the Small Business Administration, Center of Budget and Policy Priorities, and even the conservative CATO institute. Academic literature and history point out that there is no link between state income tax cuts and small business job growth.
Most small businesses pay little to no money in state income taxes. 87% of all small businesses have annual profits of less than $50,000, and 40% of all small businesses operate at a loss each year. Ohio’s income tax is assessed based on profits (gross receipts minus expenses), therefore companies with little to no profits pay little to no state income tax. Even rapidly growing companies often pay nothing in state income tax, because they are investing all income immediately back into the business and not taking profits that would be subject to the tax.
In the United States less than 14% of all tax filers are active small business owners and less than 3% have any employees. Many small businesses in Ohio are accountants, lawyers, and independent contractors who will not be expanding regardless of profits. These are individuals who have no plans to hire others or invest in meaningful ways, regardless of tax cuts.
Finally, the idea that tax cuts will encourage a business to expand and grow is not realistic based on our current economy. Business expands when the market demands it, and not because an owner has a few dollars extra in their bank account. Businesses will finance risks and expansion through loans and not just from cash resources. A 7% income tax cut (the current Ohio House budget proposal) will cost Ohio billions of dollars in the long-term, and it will provide only a few dollars to individual businesses. This money could be invested in small business loan programs, training, investments in technology, better schools, and improved infrastructure that will be much more effective and efficient at serving the needs of small businesses.